The first question that you’re probably asking yourself is “what is ROI?” ROI stands for Return on Investment and involves figuring out how to make your investments profitable for your company. You can calculate your ROI by dividing the profits over a given period of time by your total assets or invested capital. Learn how ROI impacts your business decisions and capabilities.
Why is this formula important? It can help you:
- predict future expansion
- assess projected profits
- gauge completion of goals
- analyze possible trends
- compare company’s profits with competitors and industry standards
Understanding ROI can also help you when it comes to hiring employees or contractors, creating your marketing plan, or making other investments for your company. Let’s take a quick look at how ROI impacts each of these actions.
Hiring Employees and Contractors
When it comes to hiring new employees or contractors, calculating ROI will help you measure their performance. There are generally 2 methods that can be used: increased income or cost reduction. To calculate, the increased income for your company, you need to determine the increase in revenue that you’ve experienced since hiring a particular person.
Cost reduction methods will help you determine how much money the person has helped you save for the company. Think about the role that the person plays for your company as you determine whether or not they are the investment to make to help you achieve your quantitative and qualitative milestones. Read about hiring an intern – 5 Signs You Should Hire an Intern
Creating Your Marketing Plan
As you create your marketing plan, you should be asking yourself “will this be worth the cost to the company?” Marketing includes branding, logo creation, website development, social media upkeep, advertisements, sponsorships, community involvement, app development, and more. You could try one method, track how it affects your company, and determine whether the investment is worth pursuing in the future. You could also run test groups to determine how well the marketing venture will work for your target audience.
The common mistake in the industry is to invest in increased visibility on advertising platforms and lock yourself in a 1-year contract where you’re paying hundreds of dollars each month, and then quickly realizing that you’re not receiving your return on the heavy advertising investment.
Making Investments for Your Company
Whether you’re thinking about springing for a larger office space or investing in new equipment for your business, it’s important to consider the ROI. Will the amount of business that you’ll be bringing to the office be worth the larger space? Will the new equipment help you get more business? Will it allow you to reach out to new clients that you couldn’t serve before? Track how the new equipment affects your business to determine whether or not it was a worthy investment for your company.
As you track the profits and assets of your company, you can determine whether or not you are receiving a return on your investment. The calculations that you make will help you predict future growth and determine changes that you can make in the future to make your business become more profitable.
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